This is why you should always have liability insurance, but should think twice about collision damage coverage. It’s why high deductibles are a good idea–for small expenses, it’s better to self insure. And it’s why “catastrophic” health plans, which only cover the sort of extremely expensive events that most people would have difficulty financing, are a much better deal than the soup-to-nuts plans that most people get through their employers. Those plans are expensive, both because they’re paying for a higher percentage of your expenses, and because they drive up utilization–which means that they drive up next year’s premiums even more. Imagine what your car insurance would cost if it covered gasoline, routine maintenance, and those little air freshener trees you hang from the rearview mirror. Then stop asking why health insurance costs so much.

She also discussed administrative costs in terms of making a profit, but not in “forced middleman” terms. Basically, if your doctor would be happy to receive $75 cash for a routine visit, but will spend $50 processing insurance claims, and your insurance company will spend $50 processing claims on its end, then the total cost of the transaction is at least $175. Unless the insurance company wants to operate at a loss, it will take in at least $175 in premiums from you. (Or, if there is a 90% chance that you’ll see a doctor, it will take in at least $158 in premiums.)

Even if people would see their doctors the exact same number of times per year with self-pay as with insurance, the overall system is still cheaper if people pay in cash up front. Insurance mandates force everyone to use a middleman – sort of like forcing everyone to book travel through a travel agent instead of through Expedia.com. The transactional costs become particularly absurd for the smallest-value procedures, not only because those are the easiest to pay in cash, but because the ratio of the transactional cost to the actual procedure cost is so high. No one really minds if an insurance company spends $50 processing a CT scan, but spending $50 processing a $75 transaction is mental.